GDP Growth and inflation
UNITED STATES
The U.S. economy continued to grow in Q4, although it slowed slightly compared to Q3. However, the main drivers of growth, namely household consumption and private inventories, are fragile, suggesting that the economy should continue to slow. Indeed, growth decelerated in Q1 2023. This slowdown remains progressive however as evidenced by the slow puncture of the labour market, with job creation remaining high, the unemployment rate low and wage growth buoyant. Inflation seems to have peaked in the middle of 2022, but core disinflation remains gradual in such a way that headline inflation should stay significantly above the target of 2% by the end of 2023.Nevertheless, the Federal Reserve may have completed its policy rate hike cycle given the concomitant tightening of credit access conditions. The ongoing monetary tightening is expected to drive the US economy into recession in the second half of 2023 and limit the expected recovery in 2024.
CHINA
Economic growth, which was sluggish and unbalanced in 2022, will strengthen in 2023. The end of the zero Covid policy has led to a rebound in private demand and activity in the services sector since late January, and household consumption will continue to benefit from large catch-up effects in the short term. However, while export and industrial production prospects are darkened by the weakening in global demand, activity driven by the domestic market remains constrained by important drags. In fact, the recovery in the labour market remains uncertain, the improvement in the property and construction sectors is likely to be limited, and the worrying financial situation of local governments should constrain public investment. Fiscal and monetary support is expected to be prudent. Consumer price inflation, which averaged 2% in 2022, should accelerate only mildly in 2023.
EUROZONE
Economic growth in the eurozone was better than expected for 2022 as a whole, at 3.5%, despite recording a small contraction in Q4 2022. It continued to surprise favorably in the early months of 2023 judging by the improvement in survey data (business confidence and, to a lesser extent, consumer confidence). That said, the estimate for Q1 2023 growth has been less positive than expected, up by only 0.1% q/q. The build-up of the negative effects of monetary tightening should lead to a weakening in activity from mid-2023 onwards. Real GDP growth should be weakly positive in 2023 and 2024, at 0.6% and 0.5% respectively. Although it is expected to decline throughout 2023, inflation would remain elevated and well above the 2% target at the end of this year and still a bit above at the end of 2024, forcing monetary policy to remain in restrictive territory.
FRANCE
Real GDP growth increased in Q1 2023 (0.2% q/q in Q1, after 0.1% in Q3 2022 and 0% in Q4 2022) driven by transport equipment’s exports. However, household demand has played on the downside: household consumption stabilized in Q1 after -1% q/q in Q4 2022 whereas their investment decreased by 1.4% q/q in Q1 (after -1.6% in Q4). As inflation is still high (and has reached a new peak of 7.3% y/y in February 2023 according to the harmonized measure) and because of rising interest rates, household demand should remain subdued in 2023, weighing on our GDP growth forecast (0.5% in 2023, compared to 2.6% in 2022).
INTEREST RATES AND EXCHANGE RATES
Interest and exchange ratesIn the US, following a 25 basis point increase in the Fed Funds rate in May, the Federal Reserve is likely to stop raising interest rates. Inflation remains at an elevated level but steep tightening in lending standards should tilt the balance in favour of the end of the tightening cycle. Given the slow disinflation process, no rate cut may be expected until the beginning of 2024, despite the US economy entering recession in the second semester of 2023.The peak in long-term yields is likely to have been reached too. Bond yields should subsequently move lower as the inflation outlook improves and the market starts anticipating monetary policy easing in 2024.
Though, for the Fed, the hike in May is expected to be the last one, this should not be the case for the ECB. We expect the ECB to continue to tighten its monetary policy, by raising the deposit rate to 3.75% in Q3. As part of its monetary tightening tools, it also announced a complete halt, starting in July 2023, of its reinvestments under the APP. European long-term rates may also have peaked and should move lower, driven by both a gradual decline in inflation in the eurozone and lower US yields.
The Bank of Japan has increased the upper end of its target range for the 10-year JGB yield to 0.5% and further adjustments to the yield curve control policy cannot be excluded. Nevertheless, we do not expect the BoJ to proceed with a rate hike.
We expect the dollar to weaken somewhat versus the euro. The dollar’s valuation is expensive, positioning in the market is very long and the long-term interest rate differential should narrow. We expect the yen to remain around current levels in the near term before strengthening versus the dollar considering that the federal funds rate should have reached its terminal rate.
